I have been out of town for almost a week and pretty much without Internet access. Hence the paucity of posts. It was a wonderful escape, however one is quickly reminded how shallow TV news coverage truly is. The lack of access to meaningful information was frustrating, especially during such an interesting week.
The debt ceiling deal (scam) was finally completed. It was pure snake-oil. As expected, it accomplished nothing more than back-slapping and self-congratulations among the political class, with the requisite pruning before television cameras of course. It provided politicians with a huge increase on their credit card limit. On Thursday of this week $239 billion of new debt was added! Prior to Obama, the largest annual deficit in history was $455 billion. That represented the borrowing required for a full year, to put matters in perspective.
There should be no celebration among the citizens of the country. Additional productive output and effort will be confiscated to support this nonsense we know as government. Knowledge of this coming ensures negative results for the economy. Businesses do not take risks in an environment that is hostile to them and becoming increasingly so. Jobs and capital will continue to flee the country to climes that are more favorable.
Markets did not fall for the political kabuki dance. They saw right through the gibberish, plunging dramatically for the week. Markets appear to have focused on the debt death spiral that Washington committed us to. Europe is no better. It approaches its own implosion stage, probably faster than the US. Neither the US nor Europe can change their roads to collapse. The opportunity to save either economy passed several years ago.
There is no way to know whether the recent collapse in financial assets is short-term or a prelude to a market collapse. Markets sense what Washington does not want you to know — we are in deep doo-doo! Government has put us here and is unable to get us out. Their only strategy is to hope there is more room on the road to accomodate more kicking the can. No politician is insightful or brave enough (save Ron Paul) to understand the unsustainable and irreversibility of our condition. Pretend and extend is the strategy. “Pretend” will continue right up to the economic apocalypse. How much “extend” is exists is the big question.
The Cato Institute summarized what happened and where the US will end up:
America is on a path to becoming a Greek-style welfare state. Thanks to the Bush-Obama spending binge, the burden of federal spending has climbed to about 25% of national economic output, up from only 18.2% of GDP when Bill Clinton left office.
Government debt is unsustainable. Adding more debt, which is all the debt ceiling agreement accomplished, is akin to pouring gasoline on a raging fire. That Washington pretends otherwise is truly disgraceful. Either politicians are the biggest fools in the world or they believe their constituents are. Regardless of which hypothesis you accept, the conclusion is simple — remove all of these mountebanks/exploiters from office.
For a discussion of the debt deal fraud, see the analysis on Zerohedge. Here is an excerpt:
The debt decision and the above mentioned dire indicators leave us with two inevitable consequences: One, our credit rating WILL be downgraded, by S&P certainly, followed by Fitch and Moody’s later on. Two, we are, without a doubt, soon to see an announcement from the Fed of a third QE. Both of these items WILL lead to the final abandonment of U.S. treasuries and the dollar by the East, and likely by OPEC, ending in stagflation. That is, if they don’t commit to a dump before hand. What we are looking at is the turning point of the final phase of total structural debasement of the U.S. economy. This is it, folks. This is where illusions are lifted, lies are revealed, assumptions are squashed, and things start to get really ugly.
Markets will churn in both directions but the long-term trend is likely down. The expectation of QE3 may cause a rally. If markets have another week like this one, expect talk of such action to commence soon. The dollar versus relatively honest currencies like the Swiss franc will continue to decline. Ben Bernanke will likely take action shortly because there is no economic recovery nor will there be one. His actions will not affect the economy but may provide a temporary respite for equities. Inflation hedges like precious metals will benefit from Big Ben.
The difficulty will come when inflation begins to bind. Bernanke’s actions already have driven food prices up in this country and the rest of the world. The Middle East turmoil was partly caused by rising food prices. where people could no longer afford to feed themselves. QE3, or whatever it is called, will further drive up costs in this country without wages keeping pace. People will become increasingly poorer in terms of purchasing power. At some point, empty stomachs will create unwanted action. “Stomach politics” is inevitable under our current course.
Unfortunately, the alternative — cut government spending dramatically — puts the country into a depression and requires reductions in welfare payments. That in itself would produce civil unrest. The problem with this solution is that it results from a deliberate political decision. Voters would be blame politicians; hence, this approach will not be undertaken.
At this point, we are on an irreversible path to destruction with no possible political or economic solution. The only question is when we hit the wall. Mark Faber, quoted by CNBC, believes the following:
“The next time we have a global economic crisis, it will be much worse than 2008. Before this happens there will be money printing and there will be war. The whole system will collapse,” he said. “That’s why I’m advising people that they have to think it through. In a total collapse you don’t want to own government bonds and cash.”
He added: “Equities—they don’t perform well, but at least you have the ownership of companies. Precious metals in that environment do relatively well. And of course, oil would do well if there was a war.”
The passage of time unfortunately will likely validate much of his beliefs.
I have a graduate degree in economics and have a wish: Milton Friedman was still alive and able to a participate in the public policy discussion that has to be going through all of the economic departments across this country. I remember the lively discussions about 40 years ago when Nixon ditched Bretton Woods government gold exchange (remember the FDR gold ownership ban was still in place at that time) and imposed wage and price controls. As an opponent of hard money, I’d be intrigued to see what Friedman would recommend today. His academic disciples have not been very visible, unless you place Bernanke in the category of a Monetarist. I’d call helicopter Ben a Keynesian who likes fiat financing.
S&P has belatedly lowered the US debt rating. Tonight the Keynesian levers have all been pulled. The Monetarist levers have all been pulled. Weasely Nobel idiots like Krugman and his comedic sidekick Gore can prattle on about what our first Marxist president should have done to get this country out of the economic morass, but this much is crystal clear: statism does not work. The dollar failure is coming. The dollar, as the key international currency since WW II and world’s reserve currency, will probably be the last one of the major currencies to fold, but it won’t matter that a relative handful of much smaller governments will avoid the gross mismanagement of their currencies while the dollar as well as the rest of the federal government flops around like a fish out of water.
In these grim economic times it is important to remember that market economies are hard to destroy. This country has survived nationalization of industry during the 20th century’s wars (see railroad, telephone, telegraph, & shipping during WW I). Government regulation that has ranged from incompetent to incomprehensible has increased. The lefties prattling about “deregulation,” or “privatization,” need to visit the handful of places in the world where markets are allowed to flourish and there is a rule of law. I would put Singapore, Switzerland, and even Hong Kong in these categories.
Money has always served as a medium of exchange. Until 1971 it also served explicitly or sometimes implicitly as a store of value. Austrian economists have regularly warned that government is the only institution that could take two valuable commodities, paper and ink, slap them together, and make them virtually worthless. Sadly, the history of the last 50 years is filled with governments that have regularly destroyed their countries financial system through the collapse of their sovereign debt through excessive fiat money printing. Today, with computers, one does not even need to print it. Your central bank can provide digital credits and the national government is off to statist spending sprees. The crazy Krugman’s of the world will provide an infinite number of rationalizations to support these “good intentions,” on the road to fiscal hell.
I work with elected officials. One recently warned that he thought that we were entering another recession/downturn. This warning was televised, but ignored by the news media here. The next day the Dow dropped 512 points. I have warned him that the rewards in the Old Testament for prophets is not good.
This elected official is even distributing copies of Rothbard’s “What Has Government Done to Our Money?,” in his office. Sadly, this official is in no position to influence government monetary policies. I am quietly suggesting that elected officials read John Mauldin’s “Endgame.” I was delighted to read that a number of members of Congress from both parties had Mauldin come to Washington to visit with a dozen house and senate members recently. I read about this meeting from Mauldin’s email. The members of Congress then turned around and passed the pathetic debt ceiling extension that drew the S&P rebuke.
I am re-reading Friedman & Schwartz’s “Monetary HIstory of the U.S.,” and focusing upon the nasty economic downturn of 1920-21. What is interesting is the fact that the successful financial reforms that Harding/Coolidge administrations put in place seemed to defy the Monetarist wisdom about the need for monetary expansion. Monetary growth was a source of dispute between the Fed’s Benjamin Strong and Treasury Secretary Andrew Mellon during this time too. Mellon wanted more expansive monetary policies, so certain traits of treasury secretaries never changes.
Here is a quick list of steps that could solve our financial challenge in no particular order:
1) Repeal the income taxes and payroll taxes and replace it with the “Fair Tax,” on retail consumption.
2) If 1) won’t be done: implement a flat income tax (see Forbes and Armey).
3) If 1) or 2) won’t be done: make the Bush tax cuts permanent.
4) End the regulatory morass: end the war on industry being conducted by the EPA and end the effort to tighten ozone levels to below background levels of 60 PPB. Ditto for other dramatic but impractical efforts to put mercury in all our light bulbs while having them all built overseas and terminate the on going “manmade global warming,” fraud.
5) End the war on coal by the EPA.
6) Begin drilling for oil and natural gas on shore and off shore as well as promoting new drilling and recovery technologies. There is more oil shale in three western US states than all of the reserves in Saudi Arabia and Venezuela.
7) Sell off federal lands (see oil shale 6) and other assets like radio spectrum.
8) Terminate agencies like the NLRB that are driving businesses overseas. See Boeing’s effort to open a plant in South Carolina that is being fought by federal bureaucrats. Fire them and their bosses. Govt. “enterprises” like Fannie and Freddie need to be terminated. As long as the government is driving housing policies, this sector will not recover.
9) An alternate currency is an imperative. Hayek outlined options for a diverse array of backing for currencies. Abolish legal tender laws. Establish a framework for AU & AG re-monetization.
10) Require annual public audits of the Federal Reserve as well as the government’s gold reserves. Abolition of the Fed would be preferred but that is as unrealistic politically as this congress passing federal term limits (that is also needed IMHO). Stop funding the IMF, World Bank, UN, and other international parasites that only product the Geitner’s and Strauss-Kahn’s who promote fiat financing.
11) Federal “entitlement” programs are financially doomed. Their unfunded liabilities far exceed the approximately $15 trillion “on the books” federal debt. These programs must either reformed, replaced, or terminated. Rep. Ryan has his reform plan, but this only addresses the visible portion of the Medicare fiscal iceberg. And every day that the Obamanation remains in office with his congressional minions of Reed and Pelosi, the size of the entitlements financial problems worsens exponentially.
12) Congress should only be allowed to meet 60 days of the year. Every day they exceed this limit, they should be docked 2% of their pay. Federal budgets must be balanced and the congressional pay should be docked if it is not. The uncertainty created by the perpetual congressional session (an unintended consequence of the success of air conditioning that has now allowed contemporary Washington summers to be bearable) hampers industry. Federal employee salaries need to be tied to average private sector wages and benefits. Today, the outrageous salaries of our “civil servants,” is another data point on this country’s road to ruin.
There are more steps that should be taken, but the hour is late and this post is already too long. Others can fill in some suggestions for areas that I’ve missed.
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In a way its exciting. Not necessarity in a good way. A fer years ago in the distance on the four lane I was driving on in the town I live in I saw a car begin crossing an intersection and a tractor trailer was barreling along on the four lane approaching the intersection. The light was red on the truck and he didn’t seem to be coming to a stop. I wondered what was about to happen. For the brief second or two, there was “excitement”, or more accurately an adrenaline rush as the scene unfolded. That’s about how I feel now as I observe our nation destroying itself. The semi hit its brakes but it was too late, it plowed into the rear end of the car sending it spinning.
I see that as of 3:53 the market is up as it has been all afternoon, a four hundred point swing since this morning, pretty amazing. I’ve been puzzled by the market over the past week. I believe that this is some sort of temporary down turn and not the big one…yet. Sometimes though, these things can take on a life of their own and panic could set it, but I doubt it. The market doesn’t operate by rhyme or reason any more anyway, if it actually ever did. I believe the money printing and further inflating will buoy up the market just as it has the past year. I convinced nearly all of my coworkers last fall to transfer their retirement savings from market funds to the guaranteed government fund. Actually as it turned out, I was wrong, they could have made some money, but no one’s complaining about my advice, they all believe we’re doomed anyway.
Personally, I’m glad they passed the debt ceiling crap. I know its crap but it buys me more time and in times like this its about all we can do is look out for ourselves, our friends and loved ones. There’s not a shred of political will to do what is necessary, never was and never will be until we crash and burn. My oldest son, after struggling for a few years after graduating college, just landed a great great job, perfectly matching his computer programming degree. For his sake I hope he is able to see some success (and pay off one of his college loans himself instead of me). My youngest son was just got medically retired from the Army and gets to live on the dole for the rest of his life, although in his case he deserves it. I do hope, however, that he decides to do something with his life. I have convinced him to put as much money into precious metals as he can, and he’s started already.
I continue to buy silver along the way from time to time. Now is probably the cheapest we’ll ever see it with the current US dollar, so called. Also I’m buying grain and other foods for storage. I can survive for quite some time without Walmart, and I have other family members buying up supplies too.
Well, anyway Monty, I’m finished musing for now. You have a great site, keep up the good work.